John S. Wolfe

These are some observations gleaned from the recent international practicum of Executive MBA students at Arizona State University in Chile and Peru.

One of the visiting speakers to the Universidad del Desarrollo in Chile was Santiago Grage, the corporate finance manager for Empresas La Polar S.A., a Chilean retailer.

La Polar has an interesting story. It was created in Santiago in 1920 as a tailor shop. In the 1950s it expanded into merchandising and apparel. It grew to 12 stores.

In 1998, following problems started in Latin America by Mexico’s peso shock, La Polar went into bankruptcy. Its demise reflected problems it faced in credit and receivables, the wrong mix of clothes, and too much debt. It was taken over by banks.

A private equity firm risked $20 million to purchase the company, which had revenues of $62 million, and began a reorganization. Mr. Grage came on board as part of the management team. The firm took on the company’s personnel and leases but not its inventory or client base.

The first thing the company’s managers did was assess the market. The leading department store was – and still is – Falabella. Two other companies seemed to be having success serving high-income clientele.

So the new La Polar decided to serve the middle- to lower-income market. Managers visited residents’ homes. They took a look at what people were wearing, how they decorated their homes and what they wanted. They decided to triple the sizes of their stores to about 20,000 square feet, to offer apparel and durable goods like furniture, and to open two stores across the country every two years.

They created their own labels, purchasing items from the same factories in China that produced Ralph Lauren products. They introduced their own credit card. They made a decision to limit “alliances” with complementary businesses. They allied with a chain of pharmacies, the Santiago public transportation, and home-gas suppliers, who shared the same customer demographic. Its market share rose from 4% to 13%.

Since 1998, the value of the company has risen to $1.4 billion. Its revenues are now $437 million and growing at 20% a year. It has 40 stores in Chile.

Mr. Grage said that 2009 was “a difficult year” because of the global economic downturn. The company’s stock price – it went public seven years ago – fell from $5.45 to $1.70. (It’s back up to $5.) Management halted projects, did not fill positions opened by departures, and looked for efficiencies to get through the trough. It looked at its credit policies and – knowing its clientele – refinanced the debt of 30% of its credit users.

It intends to open two stores this year and is eyeing expansion to Colombia, where the company believes consumers are underserved.

The lesson: Identify your customers, know your customers, serve your customers, operate with a profit in mind, and don’t go overboard with debt. Not bad!